On Thursday, the Bank of England will publish its latest interest rate decision, which is largely anticipated to be the sixth consecutive increase.
The present interest rate is 1.25 percent, but the central bank could potentially raise it to 1.75 percent. If so, it would represent the highest level since December 2008.
The Bank intends to reduce the rate of price inflation. It has warned that this year’s inflation rate could surpass 11 percent.
How does increasing interest rates reduce inflation?
As Covid limits loosen and people spend more, prices are rising rapidly on a global scale.
Many businesses struggle to obtain enough inventory to sell. And as a result of increased competition for too few commodities, prices have increased.
As a result of Russia’s invasion of Ukraine, there has also been a significant increase in oil and gas prices.
Increasing interest rates is one strategy to attempt to curb growing prices or inflation.
This increases the cost of borrowing and encourages individuals to borrow less and reduce their spending. It also stimulates increased savings.
However, it is a delicate balancing act because the Bank does not wish to significantly slow the economy.
Since the 2008 global financial crisis, interest rates in the United Kingdom have been historically low. In the previous year, they were as low as 0.1%.
How high could interest rates potentially go?
Numerous analysts have predicted that interest rates in the United Kingdom will rise this month, with further hikes anticipated later in the year.
Analysts at Capital Economics believe the Bank will ultimately need to raise interest rates to 3 percent to combat inflation, although other economists believe they won’t need to go quite that high. According to Pantheon Macroeconomics, interest rates will likely peak around 1.75 percent.
The Office of Budgetary Responsibility (OBR), the government’s independent economic adviser, examined what may occur if the United Kingdom experienced higher and more persistent inflation last year.
This can occur when individuals believe price hikes will continue; firms boost prices to maintain profits, and workers seek salary increases to keep up.
OBR predicts that if this occurs, UK interest rates could reach 3.5 percent.
How are interest rates relevant to me?
Mortgages
According to the English Housing Survey, which is geographically constrained yet one of the most complete guides, little under a third of households have a mortgage.
Three-quarters of them have fixed-rate mortgages, so they will not be immediately affected. About two million individuals will see their monthly payments increase.
If rates rise to 1.75 percent, the average tracker mortgage holder will pay an additional £52 each month. Standard variable-rate mortgage holders will experience a £59 hike.
This increase is in addition to other recent rate hikes.
Compared to the period preceding December 2021, tracker mortgage customers may pay around £167 more per month and variable mortgage holders approximately £132 more per month.
Cash advances and loans
Changes in interest rates could affect you even if you do not have a mortgage.
The interest rates set by the Bank of England also affect the rates paid on credit cards, bank loans, and auto loans.
In June, the average annual interest rate on bank overdrafts was 20.23 percent and the average annual interest rate on credit cards was 18.56 percent. Now that interest rates have risen, lenders could decide to boost these costs.
Savings
The choices of the Bank also affect the rates of return on savings.
Individual banks often pass on any interest rate increases, resulting in a greater return on investment for savers.
However, interest rates on savings accounts are not keeping pace with inflation.
How does the Bank of England determine the rate of interest?
The Monetary Policy Committee, which is comprised of nine experts, determines interest rates.
They meet eight times per year, or generally once every six weeks, to discuss the state of the economy.
Their decisions are always released on Thursdays at noon.
Are interest rates increasing in other nations?
The United Kingdom is influenced by the global price increase. Therefore, there is a limit to the effectiveness of UK interest rate increases.
However, other nations are also similarly increasing their interest rates.
In the past few months, the US central bank has announced significant interest rate increases. In June and July, the Federal Reserve raised interest rates by three-quarters of a percentage point, to a range of 2.25 percent to 2.5 percent.
Additionally, the European Central Bank has hiked rates for the first time in almost eleven years, while Brazil, Canada, India, Australia, and Switzerland have also done so.
